J&F – The SEC Order

Thomas Fox

Compliance Evangelist

Today, I continue a multi-part exploration of one world’s largest anti-corruption enforcement actions, the J&F Investimentos SA (J&F) matter. It involved huge fines and penalties in both Brazil and the United States. Of course this enforcement must be considered in connection with the related action of JBS AS, a company controlled by J&F and its principal owners, which occurred back in 2017 and resulted in a penalty of $3.2 billion to be paid over 25 years after admitting to giving roughly $150 million – mostly in bribes – to Brazilian politicians. Today, we take up the SEC Order involving conduct by J&F to corruptly purchase the US-listed entity Pilgrim’s Pride, a chicken processing company.

The resolution documents include, from the Department of Justice (DOJ), the Information and Plea Agreement and a Securities and Exchange Commission (SEC) settlement via a Cease and Desist Order(Order). Interestingly, this matter was a rare instance of a corrupt foreign company engaging in bribery and corruption to purchase a US company, then using that US company to further its ongoing bribery and corruption. In that respect it is similar to the Chinese entities reverse mergers into US listed companies in the early part of the past decade. The consequences were equally catastrophic for the US listed companies.

According to the SEC Press Release, “Joesley Batista, Wesley Batista, J&F, and JBS consented to the SEC’s order finding that they caused Pilgrim’s Pride’s violations of the books and records and internal accounting controls provisions of the FCPA and agreed to cease-and-desist orders.  Further, JBS agreed to pay approximately $27 million in disgorgement and the Batistas each agreed to pay a civil penalty of $550,000. The parties must also comply with a three-year undertaking to self-report on the status of certain remedial measures.”

As we noted yesterday, a large number of the bribes paid were made to officials the Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”) a Brazilian state-owned and state-controlled bank that performed government functions, including providing financing to private companies for endeavors that contributed to the development of Brazil. Though BNDES was created to assist in the development of Brazilthrough bribery and corruption to the tune of $148 million in payments, J&F received the huge benefit of $2 billion in funding which enabled it to purchase Pilgrim’s Pride, a US listed company, out of bankruptcy in 2009 and thereby gain a foothold in the US.

To facilitate this transaction, J&F created a US listed subsidiary, JBS USA. The Brothers Batista took control of Pilgrim’s Pride and co-mingled their corruptly obtained funds in the bank accounts of Pilgrim’s Pride, of course failing to mention this on Pilgrim’s Pride’s books and records. In an even more jinky move, the Batista’s then used corruptly obtained (and co-mingled) Pilgrim’s Pride and JBS USA funds to continue to pay bribes in the US. Moreover, according to the Order, “After the acquisition, Pilgrims was majority-owned and controlled by JBS through JBS USA. Joesley Batista was the CEO and a board member of J&F, CEO and Chairman of the Board of JBS, member of the JBS USA board of directors, and member of the Pilgrims’ board of directors. Wesley Batista was a board member of JBS, CEO and a board member of JBS USA, and Chairman of the Pilgrims’ board of directors and compensation committee.” The Batista’s had full control of Pilgrim’s Pride.

Pilgrim’s Pride is certainly no spring chicken. If that name sounds familiar it may be because the Wall Street Journal (WSJ) recently reported that Pilgrim’s Pride agreed to a plea deal with the Justice Department to resolve price-fixing charges, and will pay a fine of $110.5 million. As noted in the article, “A guilty plea by Pilgrim’s, the second-largest U.S. chicken processor by sales, will make it the first company to admit in court to what prosecutors have alleged was a roughly seven-year effort across much of the U.S. chicken industry to inflate prices. That coordination pushed up poultry prices paid by fast-food chains and other chicken buyers, prosecutors alleged.”

But Pilgrim’s Pride’s recalcitrant ways come honestly, as corruption was embedded in the company’s DNA. According to New York Times (NYT) back in 1989, the company’s President Bo Pilgrim walked on the floor of the Texas Senate, while in session, passing out $10,000 “campaign contributions”. The NYT stated, “Lonnie (Bo) Pilgrim, an East Texas chicken processor, offered the personal checks, with the payee’s name left blank, to nine of the Senate’s 31 members Wednesday, two days before the Senate’s vote on a House workers’ compensation bill. Mr. Pilgrim, who said he was concerned about the high cost of workers’ compensation in Texas, defended his distribution of the checks as a way of gaining the lawmakers’ attention.” Pilgrim himself noted the checks were for “name identification” and that the money “does not infer a bribe.”

It is not clear if it was this cultural DNA, the Batista Brothers influence or simply a ‘relaxed’ attitude towards compliance or even following the law led to Pilgrim’s Pride’s action. According to the Order, “Pilgrims did not enact its own Code of Conduct until 2015, more than five years after being acquired by the Respondents, and as of 2018, nearly nine years after the Respondents acquired controlling shares, Pilgrims was still in the process of implementing a formal anti-bribery compliance program and developing policies that covered its employees and consultants. During this period, Pilgrims also lacked compliance personnel. Although Joesley and Wesley Batista signed the code of conduct prohibiting bribery, neither received any anti-corruption or ethics training.” That is right, a US publicly listed company did not even bother to put a Code of Conduct in place until 2015. Of course, if they had done so, the company might have violated its own Code by engaging in anti-trust violations.

During this time frame, the Batista’s continue to milk Pilgrim’s Pride funds which were co-mingled with JBS USA monies to pay bribes. This meant the Brothers Batista continue to make Pilgrim’s Pride books and records illegally false and inaccurate. The Order stated, “They did not disclose their conduct to Pilgrims’ accountants and independent public accountants in connection with their audit and review of Pilgrims’ financial statements from 2009 to at least May 2017 while the accountants were performing due diligence processes and internal audits. Wesley Batista failed to disclose his knowledge of any bribes paid when inquiries were made about the FCPA by Pilgrims’ independent public accountants engaged in the audit and review of Pilgrims financial statements included in reports filed by Pilgrims with the Commission.”

About the best one can say about Pilgrim’s Pride under the Brothers Batista from the compliance perspective is that it stunk.

Join me tomorrow where I look into the fine and penalty delivered to the Batista’s, JBS and J&F.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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